David Hargreaves tries to make sense of the various conflicting factors influencing the housing market as 2018 gets into swing

David Hargreaves tries to make sense of the various conflicting factors influencing the housing market as 2018 gets into swing

By David Hargreaves

First, I'll tell you what this piece is NOT going to be. It is NOT going to attempt to do a crystal ball number with our housing market.

Yours truly has attempted that on previous occasions and found himself looking at cracked glass.

It is though worthwhile as 2018 starts to get into swing to assess some of the most important factors that go into influencing the direction of the housing market.

First, it's worth considering what those factors actually are. I don't claim the following is exhaustive, but it covers a fair few bases.

Government is a category all of its own when it comes to the housing market, since it can implement a variety of policies and set any sort of rules it wants.

And this factor is going to be super important this year. We've come off nine years of a Government that's largely washed it hands of the housing market so far as any demand-side pressures were concerned.

Talking the talk

This Government is talking the talk of course when it comes to both supply and demand, with promises of Government-supported building programmes, while on the demand side there's already legislation pending to block offshore buying of existing houses. That measure's impact is likely to be very slight in a 'real' sense but might have a bigger impact than you would readily give it credit for just in terms of signals.

Then there's the Reserve Bank. The previous Government left all the dirty work to the RBNZ in terms of trying to tackle the demand side pressures in the housing market. The RBNZ has two potential big spheres of involvement with the housing market, both having an impact on demand, but both, strangely with very different objectives.

Under its monetary policy brief the RBNZ sets tone for interest rate levels with its Official Cash Rate (OCR). Rises or falls in the OCR can make it either harder or easier for house buyers to service a mortgage.

The flip side to this is the RBNZ's financial stability mandate. And it's under this umbrella that the RBNZ has been deploying its loan to value ratio limits - the LVRs - in order, effectively to reduce the amount of risk the banks are taking on. But this of course does have the impact of stifling demand - as seen most notably with the 40%.

So, between them the Government and the RBNZ are two very important rule setters.

Banking on banks

Then there's the banks. They are important of course because it's up to them to lend the money that buys the houses. Their appetite for doing so has dropped from the voracious levels seen in recent times - and not just because of the curbs being placed on them by the RBNZ and its LVRs.

Our biggest banks are Australian, and subject to now more stringent capital requirements at home - which is having an influence on what they do here. Secondly there was last year a significant drop off in the rate of new deposits for the banks, which meant the banks either had to bridge the gap with money borrowed offshore, or, alternatively, reduce the amount of money they loaned - or charge more for it. They ended up doing a bit of both.

Building activity has been something the previous Government sought to facilitate mostly through encouraging easier planning approval processes. Fair to say results have been at best mixed. New building has risen appreciably from the barely existent levels seen at the nadir in 2011, but the growth has stalled in the past 18 months. While the building consent figures for the full 2017 calendar year won't be out till early next month, they are likely to show consents figures both nationally (at maybe say about 31,500) and in Auckland (probably over 10,500) at levels last seen in 2004 (well, Auckland's figures were somewhat higher that year at over 12,000, but the national figure was 31,500).

Interest rates are a product of some of those factors and entities talked about above. The OCR didn't move from it's historically low 1.75% last year, but mortgage rates did shift upwards somewhat due to the aforementioned bank pressures.

Inflation's important because the presence or non-presence of it is the arbiter of whether interest rates will move up or down, or at all.

Migration moves

Migration is significant. If people leave the country there's less need for housing. If a lot come in there's need for more housing. Obviously we've been in the 'a lot come in' category in the past few years, helping to put pressure on particularly the Auckland market.

So, there we go. I'm sure there's other things you can think of that help to go into the 'mix' in terms of setting the tone for the housing market. But certainly the factors mentioned here are all significant components.

And in looking at them all going into this year, the clear thought that emerges is that a number of them are heading in differing directions - that is, some are conducive for a more active and rising housing market, and others are not conducive.

I think whatever the Government does or doesn't achieve this year in its efforts to ramp up the supply of affordable housing will be key. Any wannabe housing investors are likely to sit on their hands this year till it starts to become clearer what the Government will be able to achieve. Personally, I remain unconvinced as to what the Government's efforts will achieve. I suspect the Government will end up 'taking up the slack' and effectively substituting itself in the place of would-be private development. So, whether the overall building figures get the massive incremental upward shift indicated by the Government's policies is a key question to be answered.

Theoretically the Government's building programme should put downward pressure on the housing market. But if the Government simply ends up replacing a lot of private sector activity the credibility of what it's trying to do may become damaged and the housing market may start to tighten up again anyway, price wise. So, it really does depend on how well the Government can do. As I say, I'm still not convinced.

Loosening up on the LVR front

The Reserve Bank has already loosened the LVR limits both for owner-occupiers and housing investors, as from January 1. So, this should be a bit more conducive for the housing market - as theoretically it makes it a bit easier for people to borrow. But of course, whether people want to also depends on things like the above Government policy on new building. But, no doubt, after being such a meanie these past few years, the RBNZ will be being seen in a kinder light right now. And it's possible more loosening of the restrictions will follow.

The RBNZ should also be bearer of glad tidings on the interest rate front this year too. The lower than expected inflation figures for the December quarter have now got most economists taking any potential OCR rises off the table for this year. Inflation's expected to remain very benign. No economists I know of are at this stage talking of the possibility of the OCR being actually REDUCED - but personally I would not rule out that possibility if inflation really doesn't re-emerge later this year. One potential fact that might change the picture there is increasing expectations of wage rises - which I think we will see. Hey, it IS a Labour-led Government.

Now of course the RBNZ sets the tone for interest rates with the OCR, but as we saw with some mortgage rate increases last year, the banks will not slavishly follow the OCR - if they have their own specific funding requirements to meet. But there's some fairly encouraging news on this front too. The big squeeze that appeared to be on last year seems to have alleviated. More deposits have been flowing into the bank coffers in recent months and therefore conditions appear now to be more conducive certainly for now more mortgage rate rises and possibly for some increased lending - particularly with the LVRs being loosened a bit. So, again that's potentially a positive for the housing market.

But of course one of the biggest pushes for the market in recent years has come from the influx of migrants. The latest migration figures are out late this week. And they should be interesting. 

Reduced flow

Based on Stat's NZ's seasonally adjusted figures, around a year ago, we had a net migration inflow on an annualised basis of about 72,000. If you average the four months’ worth of seasonally adjusted figures from August through November 2017, this inflow was down to around 65,000 to 66,000 a year. That's still high historically, but definitely showing signs of turning. My pick would be that there will be a step up in the number of kiwis heading offshore on a permanent or long term basis this year, coupled with less people coming in. 

The rise in net migration figures took all economists and observers by surprise. I think the rate of decline might as well. Clearly if there is a significant shift in migration patterns then this is a negative for the housing market - since it lessens demand.

So, this is all looking like a very mixed bag. 

In general terms over the next 12 months Government policies are looking like they could be a drag on the housing market, if the building programme gets traction - while the offshore buying ban assuming it is passed could be, while seemingly only symbolic, be a factor in 'putting off' would-be foreign buyers and possibly migrants too - if NZ is suddenly seen as 'non migrant-friendly'. Of course I'm view this from the mercenary perspective of house values and the holding of house values. If young people can actually afford to buy homes then that is fantastic, isn't it. 

A supportive RBNZ

But to continue. The RBNZ actions this year are likely to be supportive for the housing market - in the sense that the home buyers will be freed up somewhat by the more loose LVR restrictions, with possibly more to come, while interest rates are unlikely to move. Certainly not up anyway.

It's hard if not impossible to read what the banks will do, but I would say the chances are fairly good there will be some relaxation in their lending criteria this year. If they are not having to worry as much about funding pressures then the natural inclination to fight for market share will become stronger again, which would be conducive for the housing market.

All in all there is plenty to think about. It is not the one-way street of a few years ago where we had the incendiary housing market conditions that saw banks competing for market share and throwing the money around, where interest rates were falling, where building activity had not recovered from the very low post-GFC conditions, where migrants were starting to flow into the country and where still-hard-to-quantify, but probably appreciable numbers of offshore buyers were climbing in.

That was all a one-way ticket to rising prices. This year with the various constituent parts moving around and in some instances in opposite directions matters are far less clear. I don't think it is going to be dull though.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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30 Comments

Everybody needs and wants a home to live in. So demand will always exist in some form.
Houses are still maintaining their prices, while sales volume drops slightly.
Interest rates may be historically low, but not low on a relative global/developed country scale.
House prices are not going to drop unless there is a global shock.

Although a global shock would probably produce a global reaction, which would attempt to negate the global shock.
A local shock may well have more of an impact, as the rest of the world simply wouldn’t give a damn.

Attempt to negate the global shock? You mean something like QE?

Hi Mortgage Belt,

That's a fair summary.

TTP

10
up

Let’s say 60 to 70,000 immigrants over the last few years.
NZ I understand is a desirable destination – so why on earth do we appear to still be clamoring for teachers, doctors, builders and construction supervisors.
I think we’ve got ethnic restaurants covered, $2 (and more) shops thankfully seem to be in abundance and if worried, rest easy, supermarket shelves look to be in great shape as regards restocking.
John, Bill – thank you and great work, goodness knows what sort of mess we would have been in without you.

All the permanently customer-free nail salons we could possibly want.

Just love nearly passing out on the fumes whenever I have to walk past one of those outfits.

Imagine having to breathe that in all day for slave wages.

I know, those places will be the next "sunbeds", when we start to realise the harm from them. I was only half kidding about the passing out thing.

David, you did a splendid job at confusing the majority of readers even more about which factors actually will influence the housing market

Yvil, why would anyone be confused by this article? It simply articulates all the factors at play. Most of which readers of this site are already aware.

X2, an excellent article with the intention of creating discussion, not give an accurate to the nearest $100 what any given address will be worth on 31 December 2018!

gingerninja, you ask: "why would anyone be confused by this article?"
the answer is partially in your own post: "It simply articulates all the factors at play"
Sure most factors mentioned have some influence on house prices, but there is really only one that matters, one that overrides them all, the one that got house prices to almost double in the last few years, the same one that will cause house prices to drop if it occurs.

Yep, credit fueled greed.

We've created a social, economic and political structure that encourages this and in fact demands it.

Good gracious – the voice of the majority has spoken.

Indeed custard, the same majority I referred to in my initial post above, that is being confused even more by this article

Where is China's capital flight control measures implimented last year as a major influence. We seem in denial of its impact on the market, absent of govt. stats to support a claim for fear of being labelled xenophobic. take a look at the influence of chinese capital globally from real estate to businesses & infrastructure. All the rb & nats did was restrict resident buyers/ investors. This asset bubble has been significantly influenced by off shore money.

Shhhh now. We are not meant to talk about that. We are not meant to talk about our own NZ population explosion (actually OECD highest rate of immigration, but we are not supposed to talk about that either).

OK, own up, who actually voted for a more crowded and dysfunctional New Zealand? Who was it? Who is to blame?

Bluff, FYI, National put into law that any foreigner wanting to buy property in NZ must have both, a NZ bank account and an IRD number. This allows to trace money movement and goes a long way towards stopping money laundering.

All the Baby Boomers did because they will all be dead in a few more years and deserve a luxury retirement funded by hugely distorted house values. I mean after all they have had a tough life with huge student loans, unaffordable housing and a very competitive job market with stagnant salaries.

The bulk of the Baby Boomers will be dead around 2050, more like 32 than a few years.

Tui12 - and yes what will you have had in comparison with a boomer sport when you finally leave this earth ? Much more international travel, tax rates 50% lower than that charged to pay for the “free education” the boomer are said to have had, far far cheaper consumer goods, far far greater technology, far superior health and greater life expectancy...etc etc etc.... and you want to swap all that for a cheaper house ? I’m not sure if youre comment is just young, dumb or naive.

I think one key area to look at is the relationship between Auckland and Wellington. In particular, whether Auckland Council takes some responsibility for the housing crisis and plays its part in addressing the problem. So far there are some concerning signs.

The Auckland Council economists last week on this website came out with the easily shot down analysis that land-use regulations do not play a significant part in Auckland's high house prices. Most people could see through the analysis as an excuse for Auckland Council not to have to change any politically contentious land-use regulations -which they share responsibility for with central government.

Interest.co.nz readers may not go to the Greater Auckland website but a couple of days ago I had an article published there about a recent Auckland Council report showing a 50% reduction in feasible new builds from intensification and a 25% reduction from the Unitary Plan overall. https://www.greaterauckland.org.nz/2018/01/29/downsizing-aucklands-unita...

The interesting part of my article was an official from Auckland Council -Josh Arbury responded to the article in the comment section. Looking at Auckland's Council response from a glass half full perspective -it showed a degree of openness to discussing a contentious area, which might in the future lead to some changes from Auckland Council. Looking at the response from a glass half empty perspective the underlying message from Josh Arbury was that Auckland Council are sticking to their status quo regulatory system and it is up to Wellingon with the likes of KiwiBuild to do the hard yards to make affordable housing happen.

So we are at an interesting cusp. Will Auckland Council be a second 'opposition' to the new coalition government. Will the two Phil's go to war? Or will they realise that there is more gained from peace? How will Jacinda play this out? She was very impressive in her negotiation with Winston Peters. How will she deal with her old boss -Phil Goff?

What about Wellington -will they need to change? What if the hold-up is local government infrastructure deficits? What if local government's need alternative sources of funding -more than Phil Twyford's -targeted rates and municipal bonds proposal? Will Grant Robertson share any of his revenue -he controls the biggest tax on house building -15% of its value is GST. Will he share that? But he will have a long queue of Cabinet Ministers outside of his door -all with worthy proposals needing funding. Will he make his job harder by giving away some of his tax revenue?

Attitudes in Wellington seemed to be changing. I heard on the radio a lady from I think it was Wellington Methodist Mission and she was describing how sometimes 'money wasn't always money' when addressing poverty. What she then described is that it is no good giving a benefit to those in poverty situations if the benefit just leads to higher rents and house prices.

This is a shift from 10-15 years ago when progressives wanting to address poverty issues advocated for the likes of 'working for families' benefits. The experience since then has shown that these benefits have been entirely lost in rents and house prices inflating faster than wages and benefits.

I think Wellington is very keen on addressing the structural/systemic problems of the housing market as there is a realisation it is a key component to solving poverty issues.

It'll be a darn good thing if they address this. A number of us voters hoped National would, after deriding Working for Families as "communism by stealth", but we've only seen the perpetuating of these subsidies to property investors and companies.

It's time to start unwinding such measures while addressing the supply side of the housing equation meaningfully. I'd like to see them take David Seymour's suggestion and remove Auckland from the RMA too, and free things up a bit.

I think you have overlooked the elephant in the room. The single biggest factor in the housing market is the rentals. No less than 500,000 rentals owned by private landlords spread out all over the country. If Jacinda and Phil move in the direction they are talking aided by the likes of Grant then there will be blood on the floor. Everything the government is saying so far is deeply worrying to many landlords. Far more worrying than the banks. The issue is the government is giving tenants the idea that their landlords can be manipulated and taken advantage of. Phil is right we need more good rentals to house everyone properly. Only private landlords can do this. Lots could be said but how about encouraging the good landlords by rewarding the good ones rather than talking about punishing the bad ones.

Well said Property Leader...Thats why Jacinda and Co will have to be very careful about what they do with rental property Law/regs. The private landlords are the ones who can provide the houses, not government..they dont have the money to solve this problem.

Maybe people can buy houses if they are more affordable. Im sure if Landlords/Investors/Overseas Buyers were not pumping up the prices, houses can be bought by FHB's.

Sorry, but it is going to have to be the government as it is a complete stuff up at the moment.

It is all a dream, an illusion now. (Borrowed into existence)....all around the World.

A ray of hope flitters in the sky
A tiny star lights up way up high
All across the land dawns a brand new morn
This comes to pass when a child is born
A silent wish sails the seven seas
The winds have changed whisperin the trees
And the walls of doubt crumble tossed and torn
This comes to pass when a child is born
A rosy fume settles all around
You've got the feel you're on solid ground
For a spell or two no one seems forlorn
This comes to pass when a child is born
And all of this happenes
Because whe world is waiting
Waiting for one child
Black, white, yellow, no one knows
But a child that would grow up and turn tears to laughter
Hate to love, war to peace
And everyone to everyone's neighbor
Misery and suffering would be forgotten forever
It's all a dream and illusion now
It must come true, sometimes soon somehow
All across the land dawns a brand new morn
This comes to pass when a child is born into a rental House.

Sing along...Your tenants will love you....Their children, might not...Accomodation supplements...Taxpayer subsidies...WFF......free money, free love, no cost.....whatsoever....even better if mummy and daddy split.

Go baby...go.borrow...borrow....inflate them Houses. No recourse mortgages,...here.baby...

The more the merrier.